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Quote of the Day, Chart of the Day

“Inflation is always and everywhere a monetary phenomenon, in the sense that it cannot occur without a more rapid increase in the quantity of money than in output.”

~Milton Friedman in his book “Monetary History of the United States 1867-1960,” (co-authored with Anna Schwartz)

Exhibit A: See chart above, click to enlarge. Monthly data for CPI and M1 are from the St. Louis Federal Reserve.
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Market Signals Suggest Low Inflation, Stable Dollar

The top chart above (click to enlarge), shows the one-year percentage forward premiums and discounts for the USD vs. other currencies, based on current quotes for one-year forward exchange rates. The USD is now selling at a one-year forward premium vs. at least a dozen currencies, suggesting that the value of the USD has stabilized and might start appreciating in 2008.

The bottom chart above displays gold futures trading on the NYMEX, and shows moderate annual increases in the price of gold over the next 4 years of about 4%. Since gold is a hedge against inflation, the moderate increases in gold prices through 2011 indicate that there are no inflationary pressures building in the U.S. economy.

Bottom Line: These direct market signals suggest that: a) the fall of the USD is probably over and we can expect an appreciation of the USD vs. the pound, rupee, peso, etc., and b) the current rise in inflation (4.29% increase through November 2007) is probably temporary, and we can expect lower inflation in 2008 and beyond. See related previous post here.
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Put Your Tax Money Where Your Political Mouth Is

Challenge: If taxes increases for “the rich” are a good thing, members of Congress and presidential candidates (all part of either “the rich” or “super-rich”) don’t have wait for the Bush tax cuts to expire or for Congress to pass new tax legislation, they can immediately raise taxes on themselves voluntarily by making a gift to the U.S. Treasury.

Here is the link to the Treasury’s website with instructions for politicians, presidential candidates, or any citizen like Warren Buffet who wish to make a general donation to the U.S. government into an official account called “Gifts to the United States.”

Question: What if Edwards or Clinton proposed legislation to force everybody to “donate” 5 pints of blood every year. Wouldn’t it be a lot more credible if they were already donating blood themselves right now voluntarily, and not waiting until they were forced to “donate” blood by their own legislation?

This is from a previous CD post, and I mentioned on Larry Kudlow’s radio program today that I would re-post instructions on how politicians and Warren Buffet can pay extra taxes to the U.S. Treasury.

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Why Inflation Will NOT Be A Problem

Inflation vs. M1 Growth with a 3-year Lag
The top chart above (click to enlarge) shows the relationship between M1 Money Supply and the effective Fed Funds rate from 1999-2007. Notice that there was a 25% increase in M1 that was required to get the Fed Funds rate to fall from 6.5% in 2000 to 1%. The bottom chart shows that M1 grew between 3.5% and 6.5% in each year from 2001-2004.

The bottom chart allows for a 3-year lag between growth in the money supply and its eventual full effect on the price level and inflation (average annual inflation), and therefore matches M1 growth in 1998 with consumer inflation in 2001, etc.

November 2006-November 2007 inflation was 4.29%, and inflation averaged 2.72% for the year to date, reflecting the strong money growth in 2004 of 5.58% (allowing for a 3-year lag). The good news on the inflation front is that inflation in 2008 will reflect money growth in 2005 (assuming a 3-year lag), which was less than half (2.05%) of money growth in 2004 (5.58%).

Bottom Line: Inflation will not be a problem in the future, and will likely fall in 2008 and 2009 from its level in 2007. The money supply has been flat now for 3 years, suggesting that inflation in the future will be low and stable. The money supply (M1) has actually FALLEN over the last year.

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Consumer Spending or Business Investment?

Tune in to CNBC’sKudlow and Company” on Monday night (7 p.m. EST) for an economic smackdown between Robert Reich, former labor secretary under Clinton, and free-market Austrian economist Mark Skousen, on the question, “What drives the economy–consumer spending or business investment?” It should be an interesting debate between a demand-side Keynesian and a supply-side Austrian.

The graph above shows that retail sales is not a leading indicator of the economy, does not predict recessions (shaded areas) and is probably one of the most stable and boring economic variables. Notice in the graph above that retail sales almost never decline, even during recessions (shaded areas). Industrial production, on the other hand, is an excellent indicator of the business cycle. Notice the significant decline in industrial output in each of the last four recessions.

Conclusion: According to Skousen, “Productivity and investment are driving forces in the economy; consumer spending is the effect, not the cause, of prosperity. Say’s law (supply creates demand) trumps Keynes’s law (demand creates supply)!”

For more information check out Mark Skousen’s book “The Structure of Production.”

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Industrial Output Growth Signals Strong Economy

According to the Federal Reserve’s report today, total industrial production in November 2007 was 2.1% above its level in November of last year (see chart above). This was also the highest output growth since the first quarter of 2007 (March), and marks the 51st consecutive increase in year-to-year growth in Industrial Production (June 2003 was the last month of negative growth).

On a quarterly basis, industrial output in the fourth quarter is matching growth in the second and third quarters, when GDP growth was 3.8% and 4.9%. The current estimates of real GDP growth in the fourth quarter of 1.5% might turn out to be too low, given the continuing strength in manufacturing output.

Bottom Line: Given the continued robust growth in both real output and retail sales into the fourth quarter, the economy appears to remain on solid ground, and the economic expansion is on track to continue well into 2008.

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If Steroids Are Cheating, Why Isn’t LASIK?

Slate Magazine had an interesting article several years ago after the March 2005 Congressional hearings about steroid use in baseball, where Mark McGwire and others were required to testify. The article posed an interesting question, now relevant again with the recent MLB report on steroids: If steroids are cheating, why isn’t LASIK eye surgery?


Scores of pro athletes have had laser eye surgery, known as LASIK (Laser-Assisted In Situ Keratomileusis). Many, like Tiger Woods, have upgraded their vision to 20/15 or better. Golfers Scott Hoch, Hale Irwin, Tom Kite, and Mike Weir have hit the 20/15 mark. So have baseball players Jeff Bagwell, Jeff Cirillo, Jeff Conine, Jose Cruz Jr., Wally Joyner, Greg Maddux, Mark Redman, and Larry Walker. Amare Stoudemire and Rip Hamilton of the NBA have done it, along with NFL players Troy Aikman, Ray Buchanan, Tiki Barber, Wayne Chrebet, and Danny Kanell. These are just some of the athletes who have disclosed their results in the last five years. Nobody knows how many others have gotten the same result.
Good question, what’s the difference?
Click here to read the full MLB report on steroids.
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Upeat Consumers On A Spending Spree

WASHINGTON (Reuters)Retail sales were solid in November as the holiday shopping season got underway, but a good portion of consumer dollars went to higher-priced gasoline.

WASHINGTON (AP)It was the biggest sales advance in six months and reflected widespread strength in a number of areas from department stores to clothing shops and furniture stores.

Indeed, a closer look at today’s Retail Sales report confirms that year-to-date consumer spending IS widespread – it’s up from the same period last year in every retail sector except for “Building Materials” (only 8% of the market for total retail sales), due to weakness in the housing market.

And although consumer spending at gas stations increased by 5% this year, that is actually less than the gains in spending for clothing, food and health products. Further, if you take gasoline sales out of retail sales completely, consumer spending is still up 4.2% from last year. Higher gas prices contributed only 1/10 of 1% to overall consumer spending (see chart above)!!

Bottom Line: Despite the perception of widespread consumer gloom and pessimism, the November spending spree reflects a much more optimistic and upbeat American consumer.